Last nights Fed decision more or less panned out as expected, with the central bank cutting rates by 25bps to 2.25%, the first cut in rates since 2008, while also ending the balance sheet reduction program early. The decision to end the balance sheet reduction program was entirely sensible, as it would have made little sense to cut rates, and keep it going, when it was ending in September anyway.

All of those who were expecting the Fed to do more ended up disappointed, which given how strong some of the recent US data has been recently really shouldn’t have been a surprise to anybody. If anything it was the least the Fed could have done without getting an even bigger negative market reaction.

Nonetheless US markets threw a tantrum, slipping back sharply, with the Dow posting its worst one day fall since May, while short term bond yields, and the US dollar both pushed higher.

More significantly the decision was not unanimous, with Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed dissenting, again not entirely unexpected given recent commentary from both.

Against this sort of dissent, it would have been difficult for Fed chair Powell to argue that this was the beginning of a rate cutting cycle, and makes it unlikely that the Fed would cut again at the next meeting in September unless there is a significant deterioration in the data. Let’s face it if you have two dissenters to a July cut, it will be doubly difficult to argue for another one just six weeks later.

Powell’s rationale for the move on rates was a “mid cycle adjustment” in order to compensate for global developments and muted inflation. In other words, the Fed was deploying the old “it’s not me guv, it’s the other guy” card.

As for President Trump, while he may have got his rate cut, it was well short of what he wanted, and whatever his thoughts on Fed chair Jay Powell, the fact that we got two dissenters suggests that while Powell may be reluctant to push back on the US President, there are others on the FOMC who aren’t so reticent about doing so, and their dissent is a rather elegant way of flipping the President off, so to speak.

This is also a good thing as it reasserts, to some extent, that the Fed is independent when it comes to setting monetary policy, and not a plaything for President Trump, or his advisors.

Looking ahead to today, the Bank of England rate decision and August inflation report. It is inescapable that most areas of the UK economy have slowed significantly since the May inflation report, however there does appear to be some evidence of a pickup in economic activity in June and July.

No changes are expected to interest rates, but this scarcely matters since markets have already priced a rate cut in, due to recent concerns about the recent slowdown in the UK economy, as well as an elevation in political noise levels, and the prospect of a hard Brexit.

Bank of England Governor Carney is also likely to face some intensive questioning tomorrow as to how well prepared the central bank is for a hard Brexit, given the sudden deterioration in political relations between the UK government and the EU, and the sharp declines in the pound over the past two weeks.

On the data front we also have the release of the latest July manufacturing PMI’s for Europe. Yesterday it became apparent that the manufacturing recession that has been plaguing the rest of Europe had spread to the US after Chicago PMI dropped to 44, its lowest level since December 2015.

We can expect similarly weak readings from all of Spain, Italy, France, Germany and the UK, with none of them expected to show expansion.

In order we can expect them to come in at 48.1, 48, 50, 43.1 and 47.7, all levels which are likely to put pressure on central banks to look at further easing measures.    

EURUSD – pushed below the 1.1100 area opening up the prospect for a move lower towards the 1.1000 area, a break of which could see a move towards 1.0830. The current down move needs to see a recovery back through 1.1130 to stabilise and risk a move back to 1.1280.

GBPUSD – currently holding above the 1.2100 area, with major support below that at 1.1980. We need to see a move back above the 1.2260 area to initiate the possibility of a short squeeze back to 1.2380.

EURGBP – a sharp pullback from the 0.9200 level after several days of gains could signal a bearish reversal, which could see the euro slide back towards 0.9030 initially, and even head back towards the 0.8930 area. The 0.9300 area remains a key resistance level.

USDJPY – has edged higher but needs to overcome the 109.20/30 area to signal further gains. Support currently comes in at the 108.20 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.

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